The Supreme Court has set Dec. 4 as the date to hear arguments in the disparate impact case, Mount Holly v. Mt. Holly Gardens Citizens in Action. It is very important that the parties do not settle before the court rules in this case. Disparate impact is a controversial legal theory giving housing advocates a blunt instrument against lenders and others. Obama Administration officials understand the theory is tenuous; that’s why the U.S. Justice Department facilitated an out-of-court settlement in an earlier case involving the Minnesota city of St. Paul which would have allowed the Supreme Court to rule on the theory.
Disparate impact is the theory that a party is guilty of discrimination if the outcome of its actions is uneven across racial groups. Under the theory, the party is guilty even if it had no intent to discriminate and it applied its actions evenly across all customers. In the Mt. Holly case plaintiffs are suing the New Jersey city over its desire to redevelop a blighted neighborhood because most of the displaced residents are African-American. So while the city’s intent has nothing to do with discrimination, plaintiffs argue the result is discriminatory. They say the city is violating the Fair Housing Act which prohibits discrimination.
The fact is, however, Congress did not mention disparate impact when it wrote the Fair Housing Act. Some people argue congressional intent would have included disparate impact. That, of course, is a completely unworkable legal standard. It is hard enough to interpret law as it is written; we should not venture into the twilight zone of the intent of those who wrote it.
One of the key defenses against disparate impact is the equal protection clause. The same law can’t be used to protect people in some cases but not in others. Under the disparate impact theory, an action in one city might be ruled illegal while it would be perfectly legal in another city. This could happen if the demographics of the two cities were so different that the impact of the action on specific groups of people varied widely between them.
Bankers have a huge stake in this debate. Legal threats based on disparate impact make it more difficult for lenders to make credit available, particularly for housing. The U.S. Justice Department and the Consumer Financial Protection Bureau have affirmed reliance on disparate impact in the enforcement of laws relative to banking. The Supreme Court has an opportunity to look at disparate impact and settle the controversy surrounding this theory. Borrowers and lenders alike will be better off if the Supreme Court puts the theory in the trash can.